Horizontal vs. Vertical

Basic split in tech strategy#

The basic split in tech strategy is horizontal vs. vertical businesses.

If you work on infrastructure, you might be familiar with “horizontal vs. vertical scaling”. This is different. Here we are talking with respect to your customers.

Vertical business#

If your business is designed from the ground up to serve a single industry or customer profile, you are a vertical business. Vertical businesses typically grow by offering more and more capabilities to serve the customers they have, despite these features existing as standalone offerings elsewhere. The goal is to be a “one stop shop”. User experience can be mindblowing when it is vertically integrated- but frustrating when limitations arise.

Horizontal business#

If your business can be used by customers across any industry, you are a horizontal business. Horizontal businesses typically grow by reaching more and more kinds of customers, building any integrations required, or adding knobs and configs to accommodate their use case. The goal is to “do one thing well” and be the best in the world at it. Many “API Economy” developer tooling platforms are horizontal: Stripe, Auth0, Okta, and Twilio.

The battle between horizontal and vertical business#

The battle between horizontal and vertical is timeless in the history of computing. Here is how Andy Grove, former CEO of Intel, described the shift in the computing industry over his career:

Interdependent architectures to modular ones#

New technology categories usually start vertical because nobody else makes all the components needed. Eventually, the individual roles become well-defined enough that horizontal specialists make sense. Clayton Christensen described this as a movement from “interdependent architectures to modular ones”. This usually becomes an uncoordinated mess, so a counterbalancing movement happens. Then we arrive at an uneasy equilibrium with both horizontal and vertical players in the same industry.

There are two other analogies typically offered to describe this divide.

Apple (vertical) vs. Android (horizontal)#

Apple is 100% vertically integrated for the high-end smartphone market. From Apple Pay, iMessage, iCloud, macOS, all the way down to making its own processors. Android is a free, open-source operating system, and it is used by all sorts of phones, watch, cars, homes, cameras, TV, even refrigerator manufacturers.

Bundling (vertical) vs. unbundling (horizontal)#

A reference to this famous Jim Barksdale/Marc Andreesen quote: “There are two ways to make money in software - bundling and unbundling.” Depending on who you ask, we are in the middle or tail end of a Great Unbundling in business software - exchanging the Microsoft Office suite for Airtable, Zoom, Notion, and Slack - before we get tired of jumping between dozens of subscriptions and demand an integrated experience once again.

Maturation of technology#

The maturation of technology is usually rife for a “Cambrian Explosion” of unbundling, which is exactly what happened to Craigslist, Excel, and the chip design industry. Less mature unbundling movements that have only recently begun are Cable TV (splitting up into individual subscriptions like Disney+ and HBO Go), universities (splitting into online courses), radio (splitting into podcasts), and newspapers (although newspapers have already been decimated by social media, top journalists are now leaving and simply starting their own newsletters). There are cases to be made for unbundling everything else from LinkedIn to banks as well. These are all promising areas for startups.

Pursuing both can signal a lack of vision#

None but the most disciplined of businesses are 100% horizontal or vertical. There is usually a healthy debate within the company as to which direction to pursue, as both are valid ways to grow. However, pursuing both can signal a lack of vision and inability to accept tradeoffs and will lead to problems in resourcing, product development, and sales/marketing.

You’ll also hear this idea applied to other aspects of the business, including horizontal vs. vertical integration, horizontal vs. vertical acquisition, and horizontal vs. vertical strategy. They are all variants of business expansion along with one of these lines.